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Everyone knows how to solve debt and credit problems — make more and spend less.
However, knowing what to do is one thing; actually getting it done is another matter.
If you are in debt, then those results prove that something is standing between you and the solution you already fully understand.
Tracing the problem back to its root works like this…
That is why debt and credit problems are so difficult to resolve for most people. It’s a personal life problem (habits) masquerading as a financial problem (debt). You look for financial solutions but they don’t exist because you’re looking in the wrong place.
The emotional cause behind your debts must be resolved first to affect a permanent solution. You must change your behavior patterns that caused debt; otherwise, the problem will go away for a short time only to return later.
In other words, getting out of debt is only half of the solution: staying out of debt is what you really want. Unfortunately, debt can’t be permanently eliminated just by fixing the financial symptoms. That’s why debt payoff and reorganization strategies seldom result in a permanent cure. They do nothing to keep you from piling on new debt in the future.
You need a three-step solution that cures the underlying cause first and then treats the financial symptoms second so that you can become permanently debt free.
[Related Article: The First Thing You Must Do Before Paying Off Debt]
Debt is like a flat tire. You can reinflate the tire for a quick fix to get you down the road, but unless you find the source of the leak and fix it first, the tire will flatten again.
Permanently repairing a flat tire requires three action steps:
1. Identify the source of the leak. Why is air getting out? It could be a nail in the tire, bad valve stem, or any number of other causes. You must first identify the root cause so you can permanently fix the problem.
2. Then you must take action by repairing the cause of the leak. Until you do whatever is necessary to fix the root cause the tire will just flatten again and again no matter how many times you reinflate it.
3. Once you’ve completed the first two steps, then it makes sense to reinflate the tire — not before.
Debt works the exact same way. You must plug the holes in your budget by fixing the cause of the debt before actually pursuing financial solutions (reinflation) to pay the debt off.
Yet most people do just the opposite. They mistakenly go straight to step three by hiring a debt consolidation company, or transferring balances to a HELOC or a 0% credit card, or they try a quick fix by selling assets such as a house, boat or car.
Unfortunately, all of these methods are the financial equivalent of reinflating the tire without ever finding the huge nail that caused the leak in the first place. That is why so many debtors repeat the cycle over and over again — paying off credit cards only to run them up again. The source of the leak never got fixed so the tire just goes flat again.
The three steps below can help you identify and repair your budget leaks so that you can permanently solve your debt problems.
You are the cause of your debt.
More specifically, your debt is caused by your habits and attitudes that determine hundreds of daily financial decisions. Literally, you financial situation is a matter of habit.
In the second and third articles in this series we identified the habits that cause you to spend more than you earn, resulting in ever-growing debt. Your action step is to review those two articles first before continuing to read so you can identify which habits and attitudes caused your debt.
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Once you’ve identified the habits that cause you to get into debt the next step is to adopt new habits that move you toward wealth.
With this step you literally engineer your life to create wealth one habit at a time. This means stopping all the slow leak habits and replacing them with wealth building alternatives. Below are four questions to consider:
Once you identify the habits and attitudes that started your debt problems and kept you from solving them, then it is time to apply whatever strategies might be helpful from the list below to plug the leaks in your financial tire:
Make a realistic budget with spending limits for each category. Start by adding up and categorizing all spending from the prior 12 months to create a benchmark, then shave what is unnecessary until your planned spending is less than your income.
Track your daily spending. The first reason tracking is important is to make sure you are staying within budget. The second reason is to raise your consciousness around your spending to create further saving. For each expense ask yourself two questions: “Is this getting me the highest and best value for my money?” and “Is this taking me toward my goals or away from my goals?” These questions align your spending with your values and goals by directing all spending toward getting you want you want out of life.
Learn how to curb emotional spending. Prepare a shopping list before leaving the house and only buy what is on the list and within budget. You should also try out some of these specific tips for how to curb your shopping:
Each of these strategies has one objective — to plug all the habitual ways you leak money so that you never go into debt again. You must persist in plugging these leaks until you are spending less than you earn. You are not complete with step two until you are in compliance with this foundational law of personal finance — spend less than you earn. That is the sole criteria for completing this step.
It may take some time to achieve this objective so don’t make the mistake of trying to plug all your financial leaks instantly. Instead, pick one debt producing habit and start living the wealth producing alternative until it is comfortable and then pick another. Most people overestimate what they can accomplish in one month and way underestimate what they can accomplish in three years of dedicated effort. Be persistent. One habit at a time will get you to the goal with minimal pain.
Finally, set yourself up to win with proper expectations by realizing this isn’t a quick fix solution. It’s about long-term financial management and permanent habits that convert your debt into wealth.
The goal for this step is to spend less than you earn. When you reach this point you will have the monthly savings necessary to begin paying down your debt in the third step.
[Related Article: Can You Really Get Your Credit Score for Free?]
Now that your financial life is positive cash flow, it is time to pay off all your debt in the most reliable, efficient way possible. This step is broken into three sub-steps to make it easy to complete.
The key is to have a clear plan and execute your payoff strategy with discipline. Start by minimizing interest and expenses on your debt to stem the bleeding. Then figure out what stuff you could sell to make a quick dent in your debt. Finally, structure the remaining debts into a disciplined payoff strategy. This is the fastest, most reliable path to debt freedom.
When you follow these three steps you may be surprised how fast you can get out of debt. The key is to take it one step at a time and be persistent.
Remember: Your goal is much bigger than just getting out of debt. This three-step process sets the foundation that can literally translate your debt into wealth and transform your financial situation for a lifetime.
[Free Resource: Check your credit score and report card for free with Credit.com]
The first three articles in this series:
Image: Ron Chapple Studios
May 30, 2023
Managing Debt
September 7, 2021
Managing Debt
December 23, 2020
Managing Debt